UnitedHealth Spurns Obama Exchanges as Rules Stall Profit

UnitedHealth Group Inc. has trimmed its plans for selling to the uninsured under President Barack Obama’s health-care overhaul, in the latest sign large insurers see little gain from quickly plunging into the new market. Photographer: Michael Nagle/Bloomberg

May 31 (Bloomberg) -- UnitedHealth Group Inc. will offer
coverage in just a dozen of the U.S. health-care law’s new
insurance exchanges, in the latest sign big insurers see little
gain from quickly plunging into the new markets.

The country’s largest health insurer is taking a
conservative approach to the online markets set to open in
states Oct. 1, Chief Executive Officer Stephen Hemsley told
investors yesterday at the Sanford C. Bernstein & Co. conference
in New York. The company’s plans reflect its concern that the
first wave of newly insured customers under the law may be the
costliest, Hemsley said.

UnitedHealth will “watch and see” how the exchanges
evolve and expects the first enrollees will have “a pent-up
appetite” for medical care, Hemsley said. “We are approaching
them with some degree of caution because of that.”

The approach offers another hurdle for state and U.S.
officials trying to meet the technical challenges involved in
the exchanges, where millions of uninsured may seek coverage
under President Barack Obama’s Affordable Care Act. While local
insurers and Blue Cross plans will fill the gap in most states,
the for-profit companies would have provided added choice, said
Sarah James, a Wedbush Securities analyst in Los Angeles.

The insurers’ reluctance has become clearer as states
release details for the marketplaces at the heart of the 2010
law. UnitedHealth, Cigna Corp. and Aetna Inc. were absent from
the list last week when California announced the companies
chosen to sell in its exchange. All three decided not to bid.

‘Wait and See’

The conservatism “has probably been the biggest surprise”
as the health law moves toward Jan. 1, when many of its major
provisions are scheduled to start, said Milton Johnson, chief
financial officer at HCA Holdings Inc., the biggest U.S.
hospital chain. “It’s a new marketplace, a new risk pool, new
regulations, and I think many of the payers have decided to just
wait and see.”

That may suit investors, who don’t want companies
overwhelmed by sick customers with uncertain costs, James said.
Through yesterday, the S&P index of the five biggest carriers,
including UnitedHealth, had gained 24 percent so far this year,
compared with a 16 percent rise for the S&P 500.

UnitedHealth, based in Minnetonka, Minnesota, fell less
than 1 percent to $64.20 at 9:33 a.m. in New York. Through
yesterday, its shares gained 19 percent for the year.

‘Backing Off’

“The industry is backing off,” James said in a telephone
interview. “They’d much rather wait and observe the environment
for the first year or two.”

The Obama administration said the exchanges will offer more
choice for consumers. In 45 states, two insurers now cover more
than half the market for people who buy their own coverage,
according to a White House memo. Next year, 75 percent of
exchanges run by the U.S. government will have at least one
additional carrier to compete for consumers, the administration
said in the memo.

Aetna, the third-biggest insurer by enrollment, plans to
sell in about 14 states and reserved the right to withdraw from
markets where hospitals or regulators demand “unreasonable
rates,” the Hartford, Connecticut-based insurer said last
month. Cigna, based in Bloomfield, Connecticut, will be in five
states, Matthew Asensio, a spokesman, said by telephone.

Hemsley, the UnitedHealth CEO, said in January that the
company expected to sell in 10 to 25 of the new marketplaces,
though he stressed the number might change. He told investors
yesterday that he’s wary of the exchanges’ high-cost membership.

Risk Pools

“There will be opportunities to come back in and serve
those markets as those risk pools mature,” he said.

Projections for the exchanges have been shrinking. The
Congressional Budget Office on May 14 lowered its estimate for
their enrollment for the second time this year, to 24 million
people by 2023. The websites will be open to people who don’t
get coverage through work as well as businesses with fewer than
50 employees.

The exchanges will arrive along with new rules banning
insurers from denying coverage to customers who have medical
problems. Carriers now expect those who show up in the first
year to be a sicker group with more medical claims, according to
Wedbush’s James.

The industry also seems to be losing the negotiating battle
with doctors and hospitals, with reimbursements in exchange
plans ending up higher than what insurers had initially sought.
HCA, the Nashville, Tennessee-based hospital chain, is winning
exchange rates closer to its current commercial business rather
than the lower payments it gets from the U.S. Medicare program,
Johnson, its CFO, said in an interview.

Regulatory Questions

Add the uncertainty of regulations that haven’t been
completed in many states, and insurers have decided it’s safer
on the sidelines for now, said Brian Wright, a Monness Crespi
Hardt & Co. analyst in New York.

“They’re picking and choosing the markets where they are
very strong in the individual and small-group market and where
they have enough membership to have leverage with providers,”
he said in a telephone interview.

The exception among the biggest for-profit plans has been
WellPoint Inc., the Indianapolis-based insurer that is the
leading carrier for small businesses and those who buy coverage
outside of work. The company was one of 13 insurers named by
California May 23 to sell in its new market and has said it
plans to participate in all 14 states where it operates now.

Still, Chief Executive Officer Joseph Swedish told
investors at a May 20 conference that the exchanges were
developing more slowly than projected.

“While we believe there are some advantages to be gained
by being at the forefront of the exchange opportunities,” he
said, “we view this process as a marathon, not a sprint.”